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How the Target-Date Fund Landscape Is Evolving

5 takeaways from Morningstar’s latest report on target-date strategies

Jeff Holt, Morningstar Research Services LLC

 

Target-date strategies saw another year of strong flows from investors, lifting assets in target-date mutual funds and target-date collective investment trusts to more than $1.7 trillion at year-end 2018.  

Target-date strategies often serve as the default investment option in many Americans’ defined-contribution retirement plans. The persistent growth and massive amount of assets mean that target-date strategies are playing a key role in helping meet the retirement goals of more and more investors.  

In our latest report, we cover how investor demand for target-date strategies is evolving and how target-date providers have responded.

5 takeaways from Morningstar’s 2019 Target-Date Fund Landscape report 

  1. Price is driving popularity. Of the estimated net $55 billion investors placed in target-date mutual funds in 2018, $57 billion went to funds with expense ratios less than or equal to 0.20%. Meanwhile, funds with expense ratios higher than 0.60% saw approximately $37 billion leave during the year.
  2. Target-date providers are responding to the demand for lower-cost options. In recent years, many providers have cut costs, launched cheaper alternatives, and made their strategies available in lower-cost vehicles like CITs. Eight of the 10 largest target-date providers by total target-date assets offered their strategy through both mutual fund and CIT vehicles at year-end 2018.
  3. Target-date funds that hold mostly index funds appear poised to take the lead. Target-date fund series that held more than 80% of assets in index funds captured nearly all of the $55 billion estimated net flow to target-date mutual funds in 2018. If recent trends hold, assets in series that invest predominantly in index funds (roughly $480 billion) could overtake series that hold mainly active funds (roughly $570 billion) within a couple of years.
  4. Target-date CITs are thriving. Assets in target-date CITs grew by approximately $30 billion to over $660 billion in 2018 when assets in target-date mutual funds declined to $1.09 trillion from $1.11 trillion. Of the largest target-date providers, both Fidelity and T. Rowe Price saw positive net inflows to target-date CITs in 2018, while also experiencing net outflows from their target-date mutual funds.
  5. Vanguard is dominating the market. The firm's roughly $650 billion in total target-date assets at year-end 2018 accounted for nearly 40% market share, dwarfing the 15% market share of its next-closest competitor. In addition to its market-leading $40 billion in estimated target-date fund net inflows in 2018, Vanguard also saw roughly $28 billion in CIT net inflows.

In addition to exploring key trends in the competitive landscape, this year’s report highlights noteworthy considerations in five areas: Price, Performance, Parent, People, and Process. It also previews a few of the new data points and exhibits that will become fixtures of the enhanced Morningstar's Target-Date Fund Series Reports set to launch in June 2019.    

For more of Morningstar's analysis of the trends driving today's target-date funds, take a look at the webinar, "Target-Date Fund Landscape: Simplifying the Complex."

For the full analysis of the trends driving today’s target-date funds, download the full report.

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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

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